Last week market went up sharply after US credit rating agency Moody upgraded India’s sovereign rating to Baa2 from its lowest investment grade of Baa after 14 long years.

Many analysts expect the market to be rerated on the basis of Moody’s upgrade. While newbie investors hail the analysts view, it is better to take their views with a pinch of salt. Recency bias is one of many cognitive errors that plague investors. It refers to the human tendency to overemphasize more recent data. Just because the market went up sharply in the recent time, advisors may tell you that it will move up more now. You tend agree to the media’s view just because of Recency bias (most recent effect) and Confirmation bias. (When people tend to seek out information that confirms their existing opinions and ignore information that refutes their beliefs it is called confirmation bias)

Market bulls and bears have plenty of evidence to support their arguments. Bears say certain value metrics suggest stocks are historically expensive. The cyclically adjusted price-to-earnings ratio, which is a favourite metric of Nobel Prize-winning economist Robert Shiller, suggests stock prices are higher than any other time in history.

It is better to know the pitfalls of the market. The four most dangerous words in finance are “This Time Is Different.” Whenever you hear it, you should not just walk but run. The market is red hot but the correction may not happen immediately. Identifying stock market tops in real time can be extremely difficult. The prudent approach to an expensive market is to expect the bull market to continue while being mindful of potential signs of trouble. Any rational investor would be planning for an inevitable sharp correction.

It’s time to end the article with one reminder. Yes our monthly investor meeting for the month of November is scheduled on coming Sunday, 26th November at 5 PM. Let’s meet up and discuss more on markets.